General Terms Flashcards

1
Q

Indemnity vs Valued Contract

A

Indemnity contract: reimbursement of actual losses

Valued contract: bases benefits on a stated amount without regard for the value of the loss.

Medical expense insurance policies are indemnity contracts—the benefit cannot be greater than the actual loss. Life insurance policies are valued contracts that guarantee payment of a stated sum regardless of the perceived “worth” of the insured.

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2
Q

Errors and omissions (E&O) insurance

A

Liability insurance that protects producers from liability that may arise due to professional services they rendered in error or failed to render.

E&O coverage does not protect against willful misconduct. It will protect the producer who is sued because a mistake was made; it will not protect the producer who willfully engages in an unfair trade practice.

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3
Q

Reinsurance

A

The insurer looking to spread some of the risk is the ceding company. The insurer accepting the risk is the reinsurer. The ceding company pays a premium to the reinsurer for its coverage. When a reinsured loss occurs, the reinsurer pays its share of the claim to the ceding company.

The process through which insurance companies spread large risks among other insurers.

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4
Q

Law of Large Numbers

A

A mathematical principle that is the basis for predicting the odds of a loss occurring in a certain population in any given year.

*The law of large numbers does not predict who will suffer a loss, only the odds of a loss. While it’s impossible to predict with certainty if any one individual will die this year, it is possible to predict how many will die this year out of a group of 100,000 people born in a certain year.

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5
Q

Domestic, Foreign, and Alien Insurers

A

Insurers can be categorized by their state of domicile. There are three categories, known as _____, _____, and _____.

*Example: Excel Insurance Co. is chartered in Delaware, where Excel is considered a domestic company. In Illinois or any other state where Excel is admitted to sell insurance, it is a foreign company. In Canada or any other country, it is an alien company.

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6
Q

Contract of adhesion

A

A type of contract in which one party drafts the terms that must be accepted as-is by the other party.

*Insurance policies are contracts of adhesion. Because applicants for insurance have no input in the drafting of the insurance contract’s language, ambiguities in the contract are legally interpreted to the benefit of the policyowner.

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7
Q

Peril and Hazard

A

Two related general insurance terms:

  • Peril is the immediate cause of a loss (and the event that is insured against).
  • Hazard is any condition that increases the risk of incurring a loss.

As the immediate cause of a loss, a peril is the event that insurance protects against. A hazard increases the chance of encountering a peril.

Peril: death, disability, accidental Injury, illness
Hazard: smoking, excessive drinking, speeding

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8
Q

Mutual Insurance Company

A

A form of insurance company that is owned by policyowners. May distribute policy dividends (non-taxable) through participating policies.

*While structured in many ways like a corporation, a mutual insurance company does not issue stock and is owned by policyowners, whose evidence of ownership is the policy.

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9
Q

Concealment

A

The willful nondisclosure of material facts on an application for the purpose of obtaining insurance.

*Concealment is the deliberate withholding of material facts when applying for insurance, and is a form of fraud. Concealed facts give the insurer grounds to void the insurance contract provided it is discovered within the policy’s contestability period.

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10
Q

Stock Insurance Company

A

A form of insurance company that is owned by stockholders who may or may not also be policyowners. May distribute stock dividends (taxable).

*Like all forms of corporations, stock insurance companies may be privately held or publicly traded.

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11
Q

Buyer’s Guide and Policy Summary

A

Two related disclosure documents that are required by most states to be presented to life and health insurance applicants at some point during the buying process.

The Buyer’s Guide, given at the beginning of the buying process, explains the general features and conditions of the type of insurance being considered. The policy summary, given with the signed application, provides detailed information about the policy being purchased.

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12
Q

Risk Management

A

The natural process by which people contend with the perils faced daily, of which there are five common techniques.
1. Avoidance
2. Reduction
3. Retention
4. Sharing
5. Transfer

Selecting a higher deductible amount is essentially a risk retention technique.

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13
Q

Medicare

A

A federal insurance program that provides medical care benefits to covered workers (retirees).

Medicare has evolved over the years and now includes four parts:
A Hospital care
B Physician and lab care
C A managed care alternative to Parts A and B
D Drugs

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14
Q

Morbidity table

A

A table, compiled by health insurance company actuaries, showing the likelihood of becoming disabled or seriously ill because of sickness or accident at any age up to 100.

Morbidity rates also indicate how long a disability is expected to last.

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15
Q

NAIC

A

National Association of Insurance Commissioners (NAIC) represents the insurance department of every state, the District of Columbia, and several U.S. territories. It meets to promote uniformity through development of model insurance regulations.

While states are not required to adopt NAIC model regulations, most do adopt them in some form.

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16
Q

Agents vs. Brokers

A

Two basic types of insurance producer: an ____ represents a single insurer and a ____ sells policies from multiple insurers.

Insurance companies may use either of two types of representatives to sell their insurance products: agents (who sell only that company’s products) and brokers (independent producers who sell insurance products for a number of different companies). The term producer refers to both types.

17
Q

Loss

A

An unplanned reduction in economic value resulting from the occurrence of a covered peril.

Direct loss: death, disability
Indirect loss: loss of income due to death or disability

A direct loss is the immediate result of an event involving an insured peril. An indirect loss is more remote but may still be considered an insured loss.

18
Q

Risk Retention Group

(RRG)

A

A group of businesses or professional firms that self-insure their life and health insurance needs and use the services of an insurance company to manage the administrative tasks of doing so.

Risk retention groups give companies the infrastructure support needed to successfully self-insure their risks. RRGs were created through the federal Risk Retention Act of 1986. The Act requires that an RRG follow the insurance laws of the insurer’s state of domicile. It also requires that RRG members share a common business, occupational, or professional relationship.

19
Q

The five basic elements of a valid contract

A
  1. Offer
  2. Acceptance
  3. Consideration
  4. Competent parties
  5. Legal purpose

An applicant makes an insurance offer, which results in a contract (policy) only if the offeree (insurer) accepts the offer (application). The applicant’s consideration is the signed application and payment of the first premium.

20
Q

Insurable Risk (5 Criteria)

A

Not all risks are insurable. Those that meet five insurability criteria are known as an ____ risk.

To be insurable:

  • Loss must be definable and measurable
  • The covered peril must be accidental or outside the insured’s control.
  • The risk must be shared by a large group of similar risks.
  • The loss must not be catastrophic.
  • The risk must not be generally excluded from coverage.
21
Q

Underwriting

A

The process by which an insurance company assesses an application to determine if it represents an insurable risk.

If the risk is deemed insurable, the underwriter also determines the proper premium for that particular applicant using rates compiled by the company’s actuaries.

22
Q

Mortality table

A

A table, compiled by insurance company actuaries, showing the predicted number of deaths at every age from birth to age 100 (or, increasingly, age 120).

A mortality table shows the number of deaths that can be expected out of a starting group of people at birth. Mortality rates generally decrease from age 1 to age 21, then begin to increase progressively so that by age 100 (or 120) all people in the starting group are presumed to have died.

23
Q

Admitted Insurer

A

An insurer that has a certificate of authority in a given state is said to be an ____ insurer in that state.

A non-admitted insurer is a legitimate company that does not hold a certificate of authority in a particular state.

24
Q

Surplus (excess) lines insurance

A

A market for insurance, using non-admitted insurers, that is not available through any admitted companies in a state.

Surplus lines brokers are authorized to look to non-admitted insurers outside of the state for coverage not available in-state. Though the insurer may not be admitted in a state, the products it sells through a surplus lines broker must be approved by the insurance department of that state. Also called excess lines insurance, surplus lines insurance is more common with property and casualty insurance than with life and health insurance.

25
Q

Waiver and estoppel

A

waiver—when one party to a contract knowingly gives up (waives) a right, either by its actions or its inactions.
estoppel—the legal inability to impose a right once it has been waived

A insurer that waives its right to cancel a policy upon the late payment of a premium may be estopped from cancelling that policy if the premium payment is late again.

26
Q

Social Security (OASDI)

A

A federal insurance program that provides disability, death, and retirement benefits to covered workers and their qualifying beneficiaries.

Social Security benefits are available to covered workers, who earn rights to these benefits by paying a payroll tax.

27
Q

Risk

A

A basic insurance term referring to the possibility of incurring a loss.

Pure risk: untimely death, disability
Speculative risk: gambling, stock investments

With insurance, risk means the “chance of loss.” There are two types: pure risk (loss only) and speculative risk (loss or gain). Only pure risk is insurable.

28
Q

Aleatory contract

A

A contract in which one party may receive a benefit that is entirely out of proportion to the consideration given. This is the opposite of a commutative contract, in which each party to the contract expects to receive something of equal value from the other party.

Insurance policies are aleatory contracts. For example, a life insurance policy may pay the death benefit after as little as one premium payment. For an aleatory contract to make sense, the possibility of receiving the disproportionately large benefit must depend on the occurrence of a chance event. With insurance, it is the possibility (not certainty) of loss that permits the insurer to support an aleatory contract.

29
Q

Managerial System vs. General Agency System

A

Two variations of the career agency system in which producers represent a single company. One is headed by a company employee called a general manager (GM), the other by an independent contractor called a general agent (GA).

Two forms of career (or captive) agency system:

  • The managerial form employs sales representatives through regional offices or agencies headed by a general manager (GM), who is an employee of the insurer.
  • The general agency form uses an independent contractor (called a general agent, or GA) to produce its business. The GA is not an employee of the insurer.
30
Q

Representations and Warranties

A

Representations are statements the applicant makes on an application that are deemed to be true to the applicant’s best knowledge.
Warranties are statements the insurer makes in the contract.

Incorrect statements on an application will not void the contract as long as they were answered truthfully. For example, the applicant truthfully states he does not have heart disease, when in fact he has an undiagnosed problem. The policy would not be voided even if the heart problem was discovered during the contestability period.

31
Q

Fraternal Insurance Company

A

A non-profit form of insurance provider sponsored by an organization of people who share a common ethnic, religious, or vocational affiliation.

Fraternal insurers are nonprofit organizations, sponsored by a fraternal society, that operate under a special section of the insurance laws of the states in which they are admitted.

32
Q

Express, Implied, and Apparent Authority

A

Three basic forms of agent authority

Examples:

  • Express authority—The right to sign an application as an agent for the insurer.
  • Implied authority—Using a computer program to identify insurance needs and to recommend solutions.
  • Apparent authority—Advising the applicant to not disclose on the application any important health facts that might reduce his or her insurability.
33
Q

Independent Agency System

A

An insurance distribution system in which the manager and producers are fully independent and not affiliated with any single insurer.

Independent agencies typically represent multiple companies. Managers of independent agents, sometimes called personal producing general agents (PPGAs), are solely responsible for hiring, dismissing, and managing producers (brokers).

34
Q

Insurance regulation

A

Insurance is regulated primarily at the state level. Every state has an agency called the insurance department (called a division or bureau in some states) that is responsible for regulating all aspects of insurance transacted in that state.

Each state’s insurance department is headed by an insurance commissioner (sometimes called a director or superintendent) who has ultimate regulatory authority over insurance producers and companies doing business in the state.

35
Q

Underwriting vs. Actuarial Departments

A

Two related insurance company functions. Through the process of ____, applications are assessed for insurability and to assign premium rates. The ____ department analyzes data to help estimate future losses and to produce rate tables.

Underwriters analyze applications to determine if the applicant qualifies for the coverage being applied for and to assign premium rates based on those risks. Actuaries analyze mortality, morbidity, and loss data to help estimate future losses and to determine the company’s basic premium rates.

36
Q

Adverse selection

A

The tendency of persons at greater risk of loss to seek out and maintain insurance.

A person who is aware that his or her family has a higher than average incidence of cancer will likely try and obtain life insurance and may be inclined to avoid disclosing this to the insurer when completing the application. Likewise, a person who has just been diagnosed with cancer and rushes out to buy health insurance is displaying adverse selection. An applicant who engages in adverse selection is displaying a moral hazard.

37
Q

Insurable interest

A

An insurance policyowner’s financial interest in the person or property being insured.

38
Q

Asignee

A

The person to whom the policyowner assigns the rights in an insurable policy